May 24, 2016


Posted by CARMEN on Monday, June 21, 2010 at 8:23pm.

Maria just inherited $10,000. Her bank has a savings account that pays 4.2% interest per year. Some of her friends recommended a new mutual fund, which has been in business for three years. During its first year, the fund went up in value by 12%; during the second year, it went down by 20%; and during its third year, it went up by 15%. Maria is attracted by the mutual fund's potential for relatively high earnings but concerned by the possibility of actually losing some of her inheritance. The bank's rate is low, but it is insured by the federal government. Find the expected value of her investment after three years if she invests in the mutual fund. (Assume that the fund's past behavior predicts its future behavior. Round the answer to two decimal places.)
EV = $????

Use decision theory to find the best investment.
The bank's savings account is the better investment.
The new mutual fund is the better investment.
The bank's savings account and new mutual fund are equal investments.

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